7 ms·

What I Learned from Losing $200M

153 points by pmcpinto 11y ago

lintiness 11y ago
as an independent trader through the crisis (and now), i can relate to the debilitating stress of watching the financial system unwind. the enormity of the trades these fools made and make still astounds me, and it's all a product of lazy / greedy regulators. that kind of leverage can't result in anything long-run outside of short term over-compensation and incentive to over bet, leaving the country and the world to pick up the pieces. all of this started when investment banks were allowed to raise public money. if they were still private partnerships, you wouldn't see near the reckless risk taking we did and do.
- PhantomGremlin 11y ago
  if they were still private partnerships, you wouldn't see near the reckless risk taking we did and do Taleb makes that point, and many others in the same vein. What do you think of Taleb's books?
  - lintiness 11y ago
    fooled by randomness is his finest. black swan's a rehash for money.
- D-Coder 11y ago
  "it's all a product of lazy / greedy regulators." Uh, I think it starts with greedy traders. If they weren't so greedy, the regulaters wouldn't matter.
  - mbrock 11y ago
    You kind of have to assume they will be maximally greedy, though. That's the game.
  - Zigurd 11y ago
    If he had called the regulators timid and weak, and perhaps lazy, it would make more sense.
the_cat_kittles 11y ago
fun read, though the whole thing feels like a humblebrag
Zigurd 11y ago
"The derivative I’d sold was an option, but it worked just like an insurance policy." That sums up the whole derivatives implosion. Never mind that a rocket scientist had calculated that the foreseeable maximum downside was $30 million, this is why the insurance industry has relatively high capital requirements. Ibankers were writing exotic insurance contracts and, only because they were not called insurance, they were also flauting the capital requirements. Those who claim "it's complicated" are making excuses. The ibankers running these deals should have been jailed for violating insurance regulations.
- CapitalistCartr 11y ago
  I'm not sure I'm reading you right, but I think you mean flouting instead of flaunting.
  - Zigurd 11y ago
    You got me just before I corrected it. I don't even know how I typed "flaunting."
jbverschoor 11y ago
I think the guy would be more upset losing $50K of his own money.
- jakejake 11y ago
  Yea the title should really be "what I learned from losing $200 million of other people's money"
  - jonknee 11y ago
    Except he actually ended up making (the other people) money.
- d23 11y ago
  You don't think losing $200m of someone else's money hits you like a ton of bricks? Being in the industry he is, I think he could handle a $50k personal loss. It wouldn't be fun, but it wouldn't be life-ruining. Presumably, when the magnitude of this loss hit him, he assumed his entire career was over. That's a lot more than $50k in earnings, not to mention the personal and professional humiliation.
  - nickpsecurity 11y ago
    Exactly. Plus, the title doesn't imply it's his money. The second you find out his job you know he lost $200 million of others' money. The number plus losses by those who trusted his skill let the impact sink in.
csomar 11y ago
The thing is, people believe these guys because they come up with sophisticated stuff that looks like science fiction. It's science fiction, then it must bring lots of money, right? This stuff works this way: 1. I come up to you and tell you that we can make risk-free* money by insuring (simplified all the BS) the price of oil for the government of Mexico. Isn't that sweet? 2. I come to the government of Mexico and tell them that they can forget about price variation and the risk of it going down. We are going to insure it for you! So what happens? 1. The price goes up, or stays the same. We make money. I become rich. You make some interest on your capital. We celebrate. I write about it. I write a book about it. How we made lots of money and beat the hell out of the market. 2. The price goes down, really down. You lose money. You lose your capital. Your money simply disappears. I don't celebrate. Maybe I consider changing careers. And sure thing, I'll write about it. "How it all went wrong". And yeah, I still become rich. well. Quite a world we live in.
- codeismightier 11y ago
  Not quite -- this guy didn't naked short a put option on Maya crude. The plan was to dynamically hedge the position -- putting on a trading strategy that continuously neutralized the first partial derivative of the payoff function. The problem was the the second partial derivative was left unhedged -- oops! To put it technically, he was delta hedged but not vega hedged. Thus when volatility spiked he lost money. Even worse, he insured 2/3 of Mexico's entire production, so when things got bad there wasn't even enough liquidity to maintain the delta hedge. A better plan would be to come up with some sort of vega hedge using WTI volatility. WTI vol and Maya vol are correlated so some sort of partial hedge should have been possible, but it's very tricky. This is why other banks were not interested. It sounded like he was either too lazy or arrogant to believe he need to vega hedge and it blew up in his face.
  - JumpCrisscross 11y ago
    > To put it technically, he was delta hedged but not vega hedged. Delta, the first partial derivative on price of the Black-Scholes model of option pricing [1], is the rate at which the price of an option changes in relation to the price of the underlying asset. For example, a call option with delta=0.25 requires one own 1 unit of the underlying for every 4 options (keeping things simple) to be perfectly hedged, i.e. indifferent to changes in the price of the underlying. If you are running a leveraged operation, delta-hedged means well-hedged. Unfortunately, as the price of the underlying changes delta changes. Yes, one can describe this relationship in terms of volatility (as the price changes, volatility will spike, which in turn feeds into the value of delta). But it is simpler to describe it in terms of the second partial derivative on price, gamma. Gamma is the rate at which delta changes in respect of price. Non-derivative assets are delta=1 assets; for every dollar change in the price of AAPL the price of AAPL changes one dollar. Duh. Buying and selling delta=1 products helps one hedge delta. Gamma, being a second derivative, is non-linear. That means only non-linear products will aid you in your game against it. Options, and option-like products, are really the only ones with "gammaness". Big operations gamma hedge as much as they can while trying to keep their delta contained. For example, if you sell 100 puts, you would keep yourself delta-hedged while you try to profitably buy 100 puts. Provided the price doesn't wiggle around too much, this works. This strategy is problematic, however, if your counterparty is Mexico. Mexico wants LOTS of options. If you can't give Mexico LOTS of options, Mexico can't bother dealing with you. So you tend to want to provide Mexico with LOTS of options because LOTS of options commonly means LOTS of profits (and LOTS of fees). But the market doesn't have a bunch of people buying and selling LOTS of options. Just lots of options. So whereas one might usually be 20 or 50 or 70 percent gamma-hedged, when one just booked LOTS of options, 2% seems like a pretty good rate for the first week after the sale. Sucks to be you if Libya or Iran or the Sauds decide crash the party in that time. [1] https://en.wikipedia.org/wiki/Black–Scholes_model https://en.wikipedia.org/wiki/Black–Scholes_model
lordnacho 11y ago
Shortly before the crisis broke, Naseem Taleb came to the office to meet me and my colleagues. Hilarious character, and irreverent. He told us calculations were stupid and reminded us about ludic fallacies, narrative fallacies, and so on. My colleagues still contrived to lose $250M over about 8 weeks, blowing up the firm and the investors. One investor lost his job immediately because of it. The money was lost in very obvious way, somewhat similar to what this guy was up to, a big options trade gone wrong, in a market that was not big enough for the biggest fish to escape. What's sad is people understand the basic statistical principles. You don't know if the future will be like the past. Things move together in a crisis. The more independent tests you make, the more confident you can be in a result. (Ie if you can guess a daily coin flip right 55% of the time, that's better that being able to guess an annual coin flip 80% of the time.) And so on. But somehow investors are almost blind to everything other than recent return.
- chubot 11y ago
  Yeah, but it's totally rational, if you look at it another way. The potential upside is that I make $250 M or $2 B dollars and reap some kind of bonus, right? And the downside is that I lose my job and somebody ELSE loses the $250 M. If you don't care about anything other than yourself, why wouldn't you make that bet? I don't think a lot of the traders are purposely thinking this, but the incentives are set up so that people who act this way are rewarded and start to dominate the decision making process.
  - charlesdm 11y ago
    Probably. But honestly, not losing your investors capital is priority #1. tl;dr Don't do stupid stuff like this.
    - leereeves 11y ago
      > not losing your investors capital is priority #1 Recent evidence suggests otherwise.
  - lordnacho 11y ago
officer_gotcha 11y ago
Misleading headline. Should be 'What I learned from losing $200M of other people's money'. The answer is, of course, nothing.
cpncrunch 11y ago
Website isn't currently working, and google cached version takes a few mins to load.
- ikeboy 11y ago
  try https://archive.is/YdW7p https://archive.is/YdW7p
wobbleblob 11y ago
"What I learned from losing $200m" It looks like a blank page to me. Is the site down or is he trying to tell us he learned nothing?
- limaoscarjuliet 11y ago
  I got a blank too and that was what I thought :-) Voted!
akie 11y ago
Google's cached version: http://webcache.googleusercontent.com/search?q=cache:C81GXUoqJbwJ:nautil.us/issue/31/stress/what-i-learned-from-losing-200-million+&cd=1&hl=en&ct=clnk&gl=us http://webcache.googleusercontent.com/search?q=cache:C81GXUo... (scroll down quite a bit to read it)
glxc 11y ago
salivating to know what the number is.. enough to retire, apparently
tibarun 11y ago
It all sounds like astrologists gambling in a casino with millions of people's lives on the line.
maxlamb81 11y ago
If only he had read The Black Swan by Nassim Taleb when it came out in 2007. It would have made him question all these faulty assumptions.
dgreensp 11y ago
I would say the author had an "illusion of competence" rather than an illusion of control. In this case, at least, experts could have explained to him what he was doing wrong in objective terms before the crisis; he just didn't have perspective on his level of inexperience.
neil_s 11y ago
Can someone explain like I'm five, the trades the author made and how he turned it around to be so profitable? My understanding so far: In 2008, he made a promise to buy Mexican Maya oil in 2009, at the 2008 price of Maya. The Mexican government presumably pays him some fees for handling this risk for them. In addition, if the price of Maya goes up in a year, he pockets the difference. However, if the price of Maya goes down, he still has to buy at the higher 2008 price, but can only sell the Maya on to others at the lower 2009 price. To protect against this risk, he bought 'options' - the right, but not the obligation - to buy WTI and Fuel (amongst others) at some strike price. This is where I get lost. How was he reducing his exposure by selling Fuel, had he bought options at some super-low strike price, thus letting him earn a profit when he exercised those options and sold the Fuel? Then, what restructuring did he do with the Mexican government in a way that could benefit both Mexico and him? He had also short-sold WTI - he had bet on WTI prices going down, by promising to sell it in 2009, at a 2008ish rate, allowing him to buy it cheaply off the market and fulfill his promises. This, I understand. Then, he "accumulated a massive position in Maya", which "strengthened significantly" compared to his hedges. Does this mean that the price of Maya was recovering faster than the other oils that he had bet against, so he was able to sell his Maya at a profit?
- bboreham 11y ago
  > if the price of Maya goes up in a year, he pockets the difference. No: he sold an option, so the buyer can opt to do nothing; he benefits by just the price of the option. As time went on he bought options in other things, trying to approximate his risk in Maya crude as if it was a blend of those other things. Those options are commonly traded, so are much cheaper than the premium he charged for the Mayan option which was very specialised. > what restructuring He bought an equal and opposite option from the Mexican government for billions more than they paid for the first one. This gave the Mexicans a cash profit, and zeroed out his risk. Why was it profitable? Presumably the billions they gave the Mexicans were less than they'd actually made from the hedges, and much less than the option was really worth.
- ScottBurson 11y ago
  > To protect against this risk, he bought 'options' - the right, but not the obligation - to buy WTI and Fuel (amongst others) at some strike price. That would be a "call" option. He presumably bought "put" options, which carry the right to sell at a specified price. Then when the market price fell, he could buy at the market price and sell at the strike price, pocketing the difference. A call option is a bullish bet; a put option is a bearish one. I don't know how the restructuring worked. > Then, he "accumulated a massive position in Maya", which "strengthened significantly" compared to his hedges. Does this mean that the price of Maya was recovering faster than the other oils that he had bet against, so he was able to sell his Maya at a profit? That's how I read it.
swingbridge 11y ago
A lot of traders have the "illusion of confidence," in fact most of them do. They have good year or two and think it's the result of skill rather than luck. That confidence causes them to place riskier bets which then implode. Hedge funds follow this curve all the time... that's why you hear about massive profits one year and then next year the fund implodes. Beating the market (after fees) over and over again is something only a small elite can do. Most of the rest of the finance industry is full of people with vastly inflated views of their own abilities.
puppetmaster3 11y ago
The model in US is you privatize the wins, and tax payers pick up the loses. Is very very nice. Shall I link the Feinstein speech where she said on senate floor that 80% of voters DONT want to bail out these gamblers? Than she voted to bail them out, against 'by the people'. So if you can't beat them join them: win I win, lose you lose. Hello wall street, I'm all yours, need me to code up your derivatives, I'm there. (I wonder what candidate running for office is against this? I know one, I'll vote for that one. Hint: You can tell since the corporate media hate on him.)
laurentoget 11y ago
I felt too queasy to read the whole thing. Does he ever realize that his playful gambles caused millions of people's live to be ruined?
- meshko 11y ago
  But does his gambling real ruin people's lives? How direct is that connection?
- antod 11y ago
  Maybe you should have read the whole thing. His customer (the Mexican Govt) netted $6B out of the deal in the end.
  - fulafel 11y ago
    It's a zero sum game either way.
ryporter 11y ago
I think that this trader's recovery had a lot more to do with skill than others are giving him credit for. His key insight was the following: "It occurred to me that Mexico might be willing to restructure its deal—selling us back the option it owned, and buying a new one—in a way that would lock in billions of profits for the country, while giving me a much needed windfall too." Many traders (especially inexperienced ones) suffer from a bias to sell their winners too quickly, so that they can lock in the satisfaction of making a winning trade. By putting himself in the other side's shoes, this trader was able to find one of the few ways out of his predicament.

153 points by pmcpinto 11y ago

as an independent trader through the crisis (and now), i can relate to the debilitating stress of watching the financial system unwind. the enormity of the trades these fools made and make still astounds me, and it's all a product of lazy / greedy regulators. that kind of leverage can't result in anything long-run outside of short term over-compensation and incentive to over bet, leaving the country and the world to pick up the pieces. all of this started when investment banks were allowed to raise public money. if they were still private partnerships, you wouldn't see near the reckless risk taking we did and do.

PhantomGremlin 11y ago
if they were still private partnerships, you wouldn't see near the reckless risk taking we did and do Taleb makes that point, and many others in the same vein. What do you think of Taleb's books?
- lintiness 11y ago
  fooled by randomness is his finest. black swan's a rehash for money.
D-Coder 11y ago
"it's all a product of lazy / greedy regulators." Uh, I think it starts with greedy traders. If they weren't so greedy, the regulaters wouldn't matter.
- mbrock 11y ago
  You kind of have to assume they will be maximally greedy, though. That's the game.
- Zigurd 11y ago
  If he had called the regulators timid and weak, and perhaps lazy, it would make more sense.

the_cat_kittles 11y ago

fun read, though the whole thing feels like a humblebrag

Zigurd 11y ago

"The derivative I’d sold was an option, but it worked just like an insurance policy." That sums up the whole derivatives implosion. Never mind that a rocket scientist had calculated that the foreseeable maximum downside was $30 million, this is why the insurance industry has relatively high capital requirements. Ibankers were writing exotic insurance contracts and, only because they were not called insurance, they were also flauting the capital requirements. Those who claim "it's complicated" are making excuses. The ibankers running these deals should have been jailed for violating insurance regulations.

CapitalistCartr 11y ago
I'm not sure I'm reading you right, but I think you mean flouting instead of flaunting.
- Zigurd 11y ago
  You got me just before I corrected it. I don't even know how I typed "flaunting."

jbverschoor 11y ago

I think the guy would be more upset losing $50K of his own money.

jakejake 11y ago
Yea the title should really be "what I learned from losing $200 million of other people's money"
- jonknee 11y ago
  Except he actually ended up making (the other people) money.
d23 11y ago
You don't think losing $200m of someone else's money hits you like a ton of bricks? Being in the industry he is, I think he could handle a $50k personal loss. It wouldn't be fun, but it wouldn't be life-ruining. Presumably, when the magnitude of this loss hit him, he assumed his entire career was over. That's a lot more than $50k in earnings, not to mention the personal and professional humiliation.
- nickpsecurity 11y ago
  Exactly. Plus, the title doesn't imply it's his money. The second you find out his job you know he lost $200 million of others' money. The number plus losses by those who trusted his skill let the impact sink in.

csomar 11y ago

The thing is, people believe these guys because they come up with sophisticated stuff that looks like science fiction. It's science fiction, then it must bring lots of money, right? This stuff works this way: 1. I come up to you and tell you that we can make risk-free* money by insuring (simplified all the BS) the price of oil for the government of Mexico. Isn't that sweet? 2. I come to the government of Mexico and tell them that they can forget about price variation and the risk of it going down. We are going to insure it for you! So what happens? 1. The price goes up, or stays the same. We make money. I become rich. You make some interest on your capital. We celebrate. I write about it. I write a book about it. How we made lots of money and beat the hell out of the market. 2. The price goes down, really down. You lose money. You lose your capital. Your money simply disappears. I don't celebrate. Maybe I consider changing careers. And sure thing, I'll write about it. "How it all went wrong". And yeah, I still become rich. well. Quite a world we live in.

codeismightier 11y ago
Not quite -- this guy didn't naked short a put option on Maya crude. The plan was to dynamically hedge the position -- putting on a trading strategy that continuously neutralized the first partial derivative of the payoff function. The problem was the the second partial derivative was left unhedged -- oops! To put it technically, he was delta hedged but not vega hedged. Thus when volatility spiked he lost money. Even worse, he insured 2/3 of Mexico's entire production, so when things got bad there wasn't even enough liquidity to maintain the delta hedge. A better plan would be to come up with some sort of vega hedge using WTI volatility. WTI vol and Maya vol are correlated so some sort of partial hedge should have been possible, but it's very tricky. This is why other banks were not interested. It sounded like he was either too lazy or arrogant to believe he need to vega hedge and it blew up in his face.
- JumpCrisscross 11y ago
  > To put it technically, he was delta hedged but not vega hedged. Delta, the first partial derivative on price of the Black-Scholes model of option pricing [1], is the rate at which the price of an option changes in relation to the price of the underlying asset. For example, a call option with delta=0.25 requires one own 1 unit of the underlying for every 4 options (keeping things simple) to be perfectly hedged, i.e. indifferent to changes in the price of the underlying. If you are running a leveraged operation, delta-hedged means well-hedged. Unfortunately, as the price of the underlying changes delta changes. Yes, one can describe this relationship in terms of volatility (as the price changes, volatility will spike, which in turn feeds into the value of delta). But it is simpler to describe it in terms of the second partial derivative on price, gamma. Gamma is the rate at which delta changes in respect of price. Non-derivative assets are delta=1 assets; for every dollar change in the price of AAPL the price of AAPL changes one dollar. Duh. Buying and selling delta=1 products helps one hedge delta. Gamma, being a second derivative, is non-linear. That means only non-linear products will aid you in your game against it. Options, and option-like products, are really the only ones with "gammaness". Big operations gamma hedge as much as they can while trying to keep their delta contained. For example, if you sell 100 puts, you would keep yourself delta-hedged while you try to profitably buy 100 puts. Provided the price doesn't wiggle around too much, this works. This strategy is problematic, however, if your counterparty is Mexico. Mexico wants LOTS of options. If you can't give Mexico LOTS of options, Mexico can't bother dealing with you. So you tend to want to provide Mexico with LOTS of options because LOTS of options commonly means LOTS of profits (and LOTS of fees). But the market doesn't have a bunch of people buying and selling LOTS of options. Just lots of options. So whereas one might usually be 20 or 50 or 70 percent gamma-hedged, when one just booked LOTS of options, 2% seems like a pretty good rate for the first week after the sale. Sucks to be you if Libya or Iran or the Sauds decide crash the party in that time. [1] https://en.wikipedia.org/wiki/Black–Scholes_model https://en.wikipedia.org/wiki/Black–Scholes_model

lordnacho 11y ago

Shortly before the crisis broke, Naseem Taleb came to the office to meet me and my colleagues. Hilarious character, and irreverent. He told us calculations were stupid and reminded us about ludic fallacies, narrative fallacies, and so on. My colleagues still contrived to lose $250M over about 8 weeks, blowing up the firm and the investors. One investor lost his job immediately because of it. The money was lost in very obvious way, somewhat similar to what this guy was up to, a big options trade gone wrong, in a market that was not big enough for the biggest fish to escape. What's sad is people understand the basic statistical principles. You don't know if the future will be like the past. Things move together in a crisis. The more independent tests you make, the more confident you can be in a result. (Ie if you can guess a daily coin flip right 55% of the time, that's better that being able to guess an annual coin flip 80% of the time.) And so on. But somehow investors are almost blind to everything other than recent return.

chubot 11y ago
Yeah, but it's totally rational, if you look at it another way. The potential upside is that I make $250 M or $2 B dollars and reap some kind of bonus, right? And the downside is that I lose my job and somebody ELSE loses the $250 M. If you don't care about anything other than yourself, why wouldn't you make that bet? I don't think a lot of the traders are purposely thinking this, but the incentives are set up so that people who act this way are rewarded and start to dominate the decision making process.
- charlesdm 11y ago
  Probably. But honestly, not losing your investors capital is priority #1. tl;dr Don't do stupid stuff like this.
  - leereeves 11y ago
    > not losing your investors capital is priority #1 Recent evidence suggests otherwise.
- lordnacho 11y ago

officer_gotcha 11y ago

Misleading headline. Should be 'What I learned from losing $200M of other people's money'. The answer is, of course, nothing.

cpncrunch 11y ago

Website isn't currently working, and google cached version takes a few mins to load.

ikeboy 11y ago
try https://archive.is/YdW7p https://archive.is/YdW7p

wobbleblob 11y ago

"What I learned from losing $200m" It looks like a blank page to me. Is the site down or is he trying to tell us he learned nothing?

limaoscarjuliet 11y ago
I got a blank too and that was what I thought :-) Voted!

akie 11y ago

Google's cached version: http://webcache.googleusercontent.com/search?q=cache:C81GXUoqJbwJ:nautil.us/issue/31/stress/what-i-learned-from-losing-200-million+&cd=1&hl=en&ct=clnk&gl=us http://webcache.googleusercontent.com/search?q=cache:C81GXUo... (scroll down quite a bit to read it)

glxc 11y ago

salivating to know what the number is.. enough to retire, apparently

tibarun 11y ago

It all sounds like astrologists gambling in a casino with millions of people's lives on the line.

maxlamb81 11y ago

If only he had read The Black Swan by Nassim Taleb when it came out in 2007. It would have made him question all these faulty assumptions.

dgreensp 11y ago

I would say the author had an "illusion of competence" rather than an illusion of control. In this case, at least, experts could have explained to him what he was doing wrong in objective terms before the crisis; he just didn't have perspective on his level of inexperience.

neil_s 11y ago

Can someone explain like I'm five, the trades the author made and how he turned it around to be so profitable? My understanding so far: In 2008, he made a promise to buy Mexican Maya oil in 2009, at the 2008 price of Maya. The Mexican government presumably pays him some fees for handling this risk for them. In addition, if the price of Maya goes up in a year, he pockets the difference. However, if the price of Maya goes down, he still has to buy at the higher 2008 price, but can only sell the Maya on to others at the lower 2009 price. To protect against this risk, he bought 'options' - the right, but not the obligation - to buy WTI and Fuel (amongst others) at some strike price. This is where I get lost. How was he reducing his exposure by selling Fuel, had he bought options at some super-low strike price, thus letting him earn a profit when he exercised those options and sold the Fuel? Then, what restructuring did he do with the Mexican government in a way that could benefit both Mexico and him? He had also short-sold WTI - he had bet on WTI prices going down, by promising to sell it in 2009, at a 2008ish rate, allowing him to buy it cheaply off the market and fulfill his promises. This, I understand. Then, he "accumulated a massive position in Maya", which "strengthened significantly" compared to his hedges. Does this mean that the price of Maya was recovering faster than the other oils that he had bet against, so he was able to sell his Maya at a profit?

bboreham 11y ago
> if the price of Maya goes up in a year, he pockets the difference. No: he sold an option, so the buyer can opt to do nothing; he benefits by just the price of the option. As time went on he bought options in other things, trying to approximate his risk in Maya crude as if it was a blend of those other things. Those options are commonly traded, so are much cheaper than the premium he charged for the Mayan option which was very specialised. > what restructuring He bought an equal and opposite option from the Mexican government for billions more than they paid for the first one. This gave the Mexicans a cash profit, and zeroed out his risk. Why was it profitable? Presumably the billions they gave the Mexicans were less than they'd actually made from the hedges, and much less than the option was really worth.
ScottBurson 11y ago
> To protect against this risk, he bought 'options' - the right, but not the obligation - to buy WTI and Fuel (amongst others) at some strike price. That would be a "call" option. He presumably bought "put" options, which carry the right to sell at a specified price. Then when the market price fell, he could buy at the market price and sell at the strike price, pocketing the difference. A call option is a bullish bet; a put option is a bearish one. I don't know how the restructuring worked. > Then, he "accumulated a massive position in Maya", which "strengthened significantly" compared to his hedges. Does this mean that the price of Maya was recovering faster than the other oils that he had bet against, so he was able to sell his Maya at a profit? That's how I read it.

swingbridge 11y ago

A lot of traders have the "illusion of confidence," in fact most of them do. They have good year or two and think it's the result of skill rather than luck. That confidence causes them to place riskier bets which then implode. Hedge funds follow this curve all the time... that's why you hear about massive profits one year and then next year the fund implodes. Beating the market (after fees) over and over again is something only a small elite can do. Most of the rest of the finance industry is full of people with vastly inflated views of their own abilities.

puppetmaster3 11y ago

The model in US is you privatize the wins, and tax payers pick up the loses. Is very very nice. Shall I link the Feinstein speech where she said on senate floor that 80% of voters DONT want to bail out these gamblers? Than she voted to bail them out, against 'by the people'. So if you can't beat them join them: win I win, lose you lose. Hello wall street, I'm all yours, need me to code up your derivatives, I'm there. (I wonder what candidate running for office is against this? I know one, I'll vote for that one. Hint: You can tell since the corporate media hate on him.)

laurentoget 11y ago

I felt too queasy to read the whole thing. Does he ever realize that his playful gambles caused millions of people's live to be ruined?

meshko 11y ago
But does his gambling real ruin people's lives? How direct is that connection?
antod 11y ago
Maybe you should have read the whole thing. His customer (the Mexican Govt) netted $6B out of the deal in the end.
- fulafel 11y ago
  It's a zero sum game either way.

ryporter 11y ago

I think that this trader's recovery had a lot more to do with skill than others are giving him credit for. His key insight was the following: "It occurred to me that Mexico might be willing to restructure its deal—selling us back the option it owned, and buying a new one—in a way that would lock in billions of profits for the country, while giving me a much needed windfall too." Many traders (especially inexperienced ones) suffer from a bias to sell their winners too quickly, so that they can lock in the satisfaction of making a winning trade. By putting himself in the other side's shoes, this trader was able to find one of the few ways out of his predicament.